Prudential Real Estate Investors is by no means a small operation. With more than $40 billion of gross assets under management, $25 billion of net assets under management, operations in 15 countries and more than 400 staff on top of 400 clients, it is one of the world’s largest real estate investment managers. Allen Smith You cannot fight the market. Markets are changing dramatically, clients’ needs and demands are changing dramatically and the ways in which we all do business are changing meaningfully,” Smith says. “Fund managers at all times, but especially in periods like this, have to be very open to change. Allen Smith Our platform and organisation isn’t for everyone. Some people want to be associated with smaller more opportunity-type platforms, and no-one can mistake us for a boutique. You have to say to yourself that in an environment where you have limited resources you cannot do everything so how are you going to deploy resources in the most effective way to face off against the market.
Yet despite having such heft in the marketplace, PREI has avoided a pitfall normally associated with large organisations – that of being unwieldy. Indeed, PERE spoke with numerous private equity real estate professionals about Prudential Real Estate’s reputation in the market and several phrases came repeatedly into play: assiduous, focused and responsive.
And PREI is doing just that. As PERE sits down with Smith in the insurance company’s Rockefeller Center office, the 22-year Prudential veteran stresses just how much PREI has changed in the past year alone. In January, the firm created a new high-yield debt platform, attracting the likes of ex-Five Mile Capital Partners veteran Jack Taylor and former Rothschild executive Andrew Radkiewicz.
Last month, the firm also unveiled a new specialist UK platform, hiring three
“Markets are changing dramatically, clients’ needs and demands are changing dramatically and the ways in which we all do business are changing meaningfully,” Smith says. “Fund managers at all times, but especially in periods like this, have to be very open to change.”
Of course, PREI has scaled back in some areas, not least in development-related investments, and as Smith notes, the firm has had “its fair share of issues like everyone else”. But compared to many platforms affiliated to the likes of insurance companies and banks, PREI remains remarkably agile.
As Smith says, he has done everything from redeveloping portfolios of malls and community centres to working as chief of staff for then-PREI chief executive officer Bernard Winograd and leading PREI’s flagship commingled, open-ended fund PRISA.
Smith accepts that some people might criticise him for having a “lack of depth” in his professional life. He concedes that had he tried to gain the same range of experiences anywhere but under one roof he would have been perceived as “not knowing where I wanted to go”. Smith, though, knows exactly where he is going and argues that more than two decades of experience at Prudential have left him more than well equipped to steer the organisation through exceptionally choppy waters.
“When we started our business it was comparatively simple,” Smith says. Focused on serving the largest 400 defined benefit plans in the US, Prudential offered a series of funds to exclusively tax-exempt investors, in a single regulatory regime who generally all spoke the same language.
“Today it is effectively the opposite of that,” Smith continues. “You now have to be tremendously flexible to deal with the complexity of the environment we see before us and it has to be as natural to you as breathing. I think my background allows for that and is meaningful for dealing with the experiences that challenge us all.”
Real estate cycles
With 39 years of real estate investment management experience under its belt, PREI has been through crises before. However, according to Partners Group partner Nori Gerardo Lietz, PREI is one of only two private equity real estate firms around today that survived the RTC shakeout. In her June white paper, the real estate consultant said, other than PREI and RREEF , none of the top 15 firms, judged by assets under management in 1990, survived the period intact without either being sold for reasons related to the market crash, restructured or losing their senior management teams.
Part of the reason, she says, is Prudential’s DNA – that is, the importance of long-term relationships. Citing Winograd, now chief operating officer of Prudential’s US businesses, she recalls the time during the 1990s crisis when PREI was accused by an employee of manipulating asset values in an effort to increase fees. “PREI was literally inches away from their entire franchise being blown up,” Gerardo Lietz says.
However, by moving quickly and decisively to restructure PREI’s senior managers, procedures and processes, the parent company ensured the PREI franchise could live to see not just the next day, but the next two decades, irrespective of whether the allegations were true or false.
For Gerardo Lietz, the episode showed Prudential Financial’s long-term belief in PREI, something Smith says is as strong today as it was in the 1990s. “We are a global investment management platform with a very wide range of capabilities, across the risk spectrum, in this business for the long-term. Our parent has committed to us over a long period of time and remains committed today,” Smith says.
That commitment can be seen in the creation of PREI’s two newest platforms, the high-yield debt group and UK situations team.
In January, PREI revealed it had enticed former Rothschild executives Andrew Radkiewicz and Andrew Macland to head up a European high-yield debt strategy, unedr PREA's UK brand Pramerica which is not affiliated to Prudential PLC. That was followed in June by the appointment of former Five Mile Capital Partners veterans Jack Taylor and Steven Plust, together with Capmark Investments’ Stephen Alpart, to develop a US high-yield debt platform. Taylor will lead the global team, reporting to Smith.
“If we were going to be taken seriously as a firm that offered this sort of product we had to be willing to make a meaningful investment in people who had devoted careers to this sector and could bring us the expertise we needed in order to pursue this.”
PREI is now in the process of informally marketing its European strategy, which will focus on mezzanine investments. With little competition in the European mezzanine arena, Smith believes PREI will be able to take advantage of its “early mover” status, and has already attracted a lot of attention from investors. Although there is market talk that PREI is targeting a £500 million (€568.2 million; $826.9 million) fund, Smith says the firm is open to what investors want. “It could take a number of different forms, whether it’s a traditional commingled fund or more of a club arrangement. We’ve certainly had people talk about single client accounts. Given the capital raising environment we are in, we are being receptive to all enquiries.”
PERE sources said that whatever form the fund takes, the strategy will not just stop at one vehicle, but will be a longer-term investment strategy for PREI with possibly two or three follow-on funds that expand to consider senior debt investments in the future.
Smith says the European strategy will follow in “short order” with a US version led by Taylor. During the 1990s, Taylor headed PaineWebber’s real estate group before helping set up debt specialist Five Mile Capital Partners in 2003. In enticing the likes of Taylor and Radkiewicz though, Smith says he never “deluded” himself that the pair and their teams would automatically jump at the opportunity of joining PREI.
Smith adds: “There is a portion of the private equity real estate market that wants to invest with boutique-orientated firms and a portion that wants a more institutional manager. There’s plenty of space for both types of firms. PREI needs to be squarely in the global investment manager space and my aspiration is to be one of the leaders in that field.”
In ensuring PREI has a “sharper focus” on future opportunities, Smith says he has had to take some tough decisions, including cutting staff who had been with the firm for 15 years and whom he personally knew well. “It reflected in no way on their performance, but it was a function of how the market had changed. Those were in no way easy things to do, but you have to let the market be your guide. You have to develop a point of view about the market, where you think its going and you have to have the conviction to act on that.”
In focusing its attention on its strengths, PREI has retreated from some areas, not least development-related activities. “You have to say to yourself that in an environment where you have limited resources you cannot do everything so how are you going to deploy resources in the most effective way to face off against the market,” Smith explains. “In terms of development, there is no activity at the moment.”
“For us the market opportunities are debt, public securities and distressed property investing in that order. If you then look at where 80 percent of the investable assets and investable capital are located you get a clear idea of geographic opportunities, and it leads you to the US, the UK, continental Europe (and Germany is a very important part of that) and the developed regions of Asia, with Japan of particular note.”
Smith continues: “We have good teams in place and well positioned to capture the opportunities, including in the US and continental Europe. But for some areas we need to build scale.”
The UK is one such place. Last month, Pramerica announced it had hired three former UBS executives to develop a series of core-like funds geared towards British investors. Smith says the team, which includes former UBS Triton Property Fund managers Paul Dennis-Jones and Andrew Grigson and transaction head Charles Crowe, is expecting to offer a number of real return-orientated funds to the market in the fourth quarter adding: “The UK market is so material to the European investment universe, having a presence there was essential.”
Smith also sees the same need for scale in Latin America. PREI has the largest investment management platform in Mexico, with seven closed-ended sector-specific funds targeting industrial, residential and retail assets. The firm was on the cusp of launching a South America fund, focused on Brazil and Chile, when the financial crisis hit last year. A new fund, targeting the Santiago-Rio de Janeiro corridor, is expected in the next 12 months.
“The downturn has allowed us to gain a focus and say lets make sure we’re doing the things we do really well. What is essential though is to be responsive and flexible to the market and our clients,” Smith adds.
“We went through a period of time when general partners had the authority, the leverage and were defining the game but the pendulum has swung the other way and it’s now all about your ability as a fund manager to craft custom solutions to fit the needs of your limited partners.”
Smith repeats: “You cannot fight the market.” Instead, investors want to hear their GPs talking about how flexible they can be, even when they are one of the world’s largest real estate investment managers.
To coin the phrase of Louis Gerstner, former chairman and chief executive officer who turned around the fortunes of computer giant IBM, who says elephants can’t dance?
You cannot fight the market.
Markets are changing dramatically, clients’ needs and demands are changing dramatically and the ways in which we all do business are changing meaningfully,” Smith says. “Fund managers at all times, but especially in periods like this, have to be very open to change.
Our platform and organisation isn’t for everyone. Some people want to be associated with smaller more opportunity-type platforms, and no-one can mistake us for a boutique.
You have to say to yourself that in an environment where you have limited resources you cannot do everything so how are you going to deploy resources in the most effective way to face off against the market.